The only way out of this mess without a transfer of power from the current capital holders to a new group is that we print a whole crapload of money. I think another 5T will do the job. I'm with Krugman wholeheartedly. So many libertarians think they are clever bashing him on the basis of his advocation of government stimulus to recover the economy, and then go on to place blame on the left when job losses keep rising ... But I don't see them proposing a *better* alternative that takes into account the general health of the global economy. They complain about a future indebted class that results from these decisions, but yet conveniently don't evaluate how the future generation will be doing in alternative scenario... I'd rather have a job +debt than no job and starving. Too much debt in the system and way too high a credit multiplier until we get to a new base money level with a more sustainable lower credit multiplier. The only way assets hold their value in the face of that is a lot more base money - an unimagineable amount. Besides the tax cuts, barely any of the current round of stimulus has actually taken effect. So to those saying this stimulus isn't doing anything, they aren't exactly speaking accurately, since we haven't yet had the stimulus come through. Pick your poison. The alternative is massive unemployment (9.5% is not massive unemployment. 30%+ is), creative destruction, etc... the Austrian prescription. Inflation or a terrible decade until we can tolerate it no longer and by default find someone new to fight a war with. Those are the realities. Any others are a delusion for idealists. The "burying of future generations in debt" (or inflation-tax dollar devaluation) was *already* done over the past decade. What we are doing now to prevent free-fall is pre-ordained ... We long ago made our destiny (by allowing money formed by credit to have such high creation multiples) - once you do it, there is no going back (without default). I hardly call borrowing 6% of GDP in the face of the credit-bust we are seeing a revolutionary action, even though the notional numbers are staggering.
Did not read the article or the comments by ET folks but would want to point out one thing: Stimulus did keep the banking system afloat and massive unemployment at bay. Without stiumulus package we would have seen CHAOS in the US and the world. I MEAN HORROR MOVIE STYLE CHAOS. If another stimulus package is needed then US will have to go for it. What will happening is US government will own lot more assets and companies, kind of socialism, and USD will take major hits. This will only be reversed if EU and other nations face similar trends and issue their own stimulus packages, then everyone will still run to the USD's safety and there might only be a controlled correction of this currency. Government has saved Housing, Banks, Car companies. I think and hope that they are at the end of the barrel and soon stimulus packages will end. No need to bail out the 711 and NoFrills type stores or ball game teams and designer clothing franchises. Government has to draw and declare a line.
You speak of idealism, and yet you dogmatically propose that printing an "unimaginable" amount of money is somehow pragmatic. Let's break down the mechanics of what really transpired, in essence: 1) Decades of artificially low interest rates and allowing banks to sell loans to 3rd parties (securitization), combined with a massive consumer (irrational) appetite for debt, caused a housing super-spike that has only deflation by about 50% thus far. 2) Trillions of "dollars" that the bank "created" and loaned, had 0 economic underlying value. Zero. They essentially gave money to someone with no means of repaying it, and this person spent it on buying an asset whose value was artifically high precisely due to incessant lending (increased demand). 3) The spike in household wealth likely spiked the stock market far beyond its economic means since people, businesses and banks invested and consumed more, thinking they were wealthy (income effect). To sum up: The economy was nothing more than a bubble of epic proportions, with 0 economic value underlying the "dollars" of wealth that is being "destroyed." The wealth has dissapeared, but the debt remains. Of course, some sort of financial system stabilization is required (preferably in the form of an accountable government-run system, or at least massively regulated like Canada). However, excessive money-printing to re-inflate the bubble and re-spike asset/stock prices will do nothing except shift the burden to future periods to feel the pain of the "wealth destruction". The problem is that the further you stave off the pain, the EXPONENTIALLY larger the debt from the deficit-spending becomes, due to the time-value of money. 1 dollar of debt today to pump up a meaningless stock market (0 underlying economic value) will be many more dollars of debt that a future generation will have to pay. A generation already encumbered by the debts generated by today's generation and likely won't even have the dollar as the world reserve currency to help bail them out.
I think he does consider it. The dollar needs to weaken -- its strength is handicapping our competitiveness on the global market. And last I checked US govt debt is in a very manageable position. The govt is selling a hundred billion or two a month and the thirty yr yield is at 4.3%... That includes a bit of monetization in the mix. The credit multipliers have been so stretched in the past, the dollar strength you see is telling of how money demand dwarfs money supply. that in the face of around 700-800b in treasury/agency monetization already done so far!! (that doesn't even include excess bank reserves of another 726b)
This is the interesting point. In my eyes, wealth is defined by things. In a way, no wealth has been destroyed. Who owns it merely has changed. Just a shift in the balance that defines the value of monetary assets versus nonmonetary assets. In the end, control over nonmonetary assets is what matters. (you can't live in money, you can't eat money, you can't put money in your fuel tank, and you can't make a decent ipod or car with it -- whether paper or electronic)
1) Every day we see news reports that countries are considering moving away from the dollar in trade as well as holding US dollars in reserve. India jumped on that train today. 2) The debt may be "manageable" compared to some Euro countries or historic debt-to-gdp levels, but it is PROJECTED to become MASSIVELY unmanageable due to the unique set of obligations the US has going forward. Also, payment towards just interest on the debt already constitutes the nation's #2 expenditure after health care. http://www.cnbc.com/id/31723265 3) The government manipulated the accounting of debt auctioneering last month to confound the number of foreign investment with other types of indirect investment, because the US Gov understands that there would be somewhat of a panic if we could clearly see that we are losing the faith of our foreign financial backers. 4) The foreign debt on the head of each American citizen combined with the US Gov's foreign debt and combined with the current account deficits are all at phenomenally high levels. Debt to Equity for the american consumer is at an all-time low. --- Long story short: Taking out a loan may be a good idea for a business to get back on it's feet under SOME circumstances. In OTHER circumstances, deficit-spending will only lead to a deterioration in standard of living. The concept has been well-studied in corporate finance for decades (trade-off theory of debt), and the same applies to a nation (especially a debtor-nation).
Exactly. The monetary wealth has dissapeared (which represents control over things). In its place is debt. The thing has switched ownership and the only thing many Americans own now is the expectation of lesser jobs and interest payments.
When you make the 'business' in this case 'government', there are plenty of circumstances where deficit spending achieves positive results. ie WW-II was a deficit spending project that dwarfed this one in real terms, and it led to a generally increased period of prosperity. Same goes with Reagan deficit spending period... etc.. I think you need to clearly define the criteria of 'SOME' versus 'OTHER' to make this worth talking about. The government, since it is made of everyone involved (the national population) with an interest towards success at any cost, is unlike a traditional business, in that its line of credit is unlimited at the expense of every past dollar put into existence. If I had an unlimited line of credit no matter what the circumstance (no recourse) as a business owner, I'm sure I'd eventually find a way to make money even in the most adverse circumstances. I could just keep martingaling on black until it worked out. In business you are only as good as your last payoff. Devaluation (within reasonable levels) by elevating money supply is a textbook stimulus tool in itself, and done in the right conditions, can be very useful. We are far from zimbabwe, and have amongst the best of real resources in skilled (and unskilled) labor, real natural resources, military/diplomatic dominance, geographic trade/military advantage, and capital-trusting order in society... It may piss of cash and bond hoarders and favor debtors, but such is life ... that is the risk of hoarding cash. There is no better time than during the next few years to be an accumulator of real assets. Levels of uncertainty has little to do (at least with positive correlation) with predicting outcomes. (2003-2007 was a period of relative certainty, and we know how that worked out)
The man knows full well what will happen to the dollar, he wants it to fall. This has to happen for the us manufacturing job holders ( Unskilled workers aka Krugmans constituentcy) to prosper.
Very, very well put. Falsely re-inflating the economy and assets, just pushes the problem (and it will be BIGGER) down to future generations. I'm really afraid to say that the only way out is to let the bubble fully deflate right now - yes, let the banks burn; yes, let AIG burn; yes, let the car industry burn. This will result in 20-25 % unemployment, people jumping off buildings, the whole 9 yards. But, it will permit us to reach bottom, in an organized, market-driven fashion, will stop the bleeding quicker, and will result in an ability to heal the systemic problems we face, in a much more orderly fashion. Now, putting yourself in Obama's shoes, is this a politically favorable way of handling things ? HELL, NO. He is stuck between a rock and a hard place: helping those in distress in the short-term, cultivating his political viability, and just plain doing something. Doing nothing, is not a viable option for him politically.